FINRA Series 7Processes and Confirms TransactionsEasy
A customer purchases a non-exempt security for $10,000 in a cash account. The broker-dealer determines that the customer has failed to pay for the security by the payment due date. What action must the broker-dealer take?
- AExtend the payment period by an additional 7 business days without penalty.
- BSell out the securities and freeze the account for 90 days.
- CTransfer the securities to a margin account and charge interest.
- DIssue a Reg T call and allow an additional 5 business days for payment.
Show answer & explanationAnswer & explanation
Correct answer: B. Sell out the securities and freeze the account for 90 days.
Under Regulation T, if a customer fails to pay for a security in a cash account by the payment due date (T+2 + 2 business days, generally T+4), the broker-dealer must sell out the securities and freeze the account for 90 days. During the 90-day freeze, the customer must pay for all purchases in full, in advance of the trade.
Why the other options are wrong
- A. Extensions can be requested from FINRA or the designated examining authority, but they are not automatic and are typically for shorter periods, and the question implies the payment due date has passed without an extension.
- C. Transferring to a margin account is not an automatic remedy for failure to pay in a cash account; the Reg T rules require a sell-out.
- D. A Reg T call is typically for margin accounts, and the payment due date has already passed. The action required is more severe.
Reg T Cash Account Freeze
A penalty imposed on a customer's cash account for failing to pay for securities purchases by the Regulation T payment due date.
- Occurs when payment is not received by T+4 (or extended date).
- Broker-dealer must sell out the unpaid securities.
- Account is frozen for 90 days, requiring cash up front for new purchases.
Memory trick: No cash, no pay, 90 days frozen, come what may!